Multi-state effort to collect taxes begins Oct. 1

By Matthew French
Staff Writer

Starting Oct. 1, South Carolina retailers who sell goods online to out-of-state customers will have the option of charging sales tax as part of a growing effort for states to collect billions of dollars they say they are losing through e-commerce.

The Streamlined Sales Tax Project is a multi-state effort to create uniformity in the way states collect sales tax for items their residents purchase out-of-state. If a customer today makes an online purchase from a company located in a different state, sometimes the company collects sales tax based on the state in which the company is located, sometimes based on where the consumer is located and sometimes not at all. This inconsistancy creates confusion for departments of revenue looking to collect.

To end that confusion, the Streamlined Sales Tax Project will allow vendors to opt into the system and receive the software necessary to help collect taxes, pay them to the revenue department and file a standard return. While South Carolina has not signed on to participate in the program, 20 states are in full or partial compliance and can start collecting taxes through the system beginning Oct. 1.

“This project offers a simplification and uniformity for companies to help them collect sales taxes,” says Diane Hardt, Wisconsin’s tax administrator and co-chair of the Streamlined Sales Tax Project. “This will put all sellers on a level playing field so consumers can’t shop around for a company that won’t charge the sales tax.”

The U.S. Supreme Court ruled in 1992 that companies cannot be expected to collect sales taxes from consumers if the company does not have a presence in the state to which their goods are sent. Hardt says the landscape in 2005 is vastly different than 13 years ago and software is now available to help companies do just that.

“I think the states are going to act and pursue retailers to collect these taxes,” she says.

“The technology, software, rate jurisdiction databases and uniform definitions exist such that retailers should be able to collect. Estimates vary that states are missing out on between $15 billion and $20 billion in sales from online purchases.”

Small businesses will likely be exempt from any future state or federal legislation to collect taxes fron online sales, given that Congress has proposed a $5 million gross receipt minimum for mandatory compliance. While any federal legislation is likely years away, Hardt says she hopes the success of the Streamlined project will spur action on Capitol Hill.

Use tax seldom paid

Most states already require their residents to pay a use tax for items purchased elsewhere, whether it be through an online purchase or from a store in another state. But, concedes South Carolina Department of Revenue spokesman Danny Brazell, most people don’t pay the tax either because they don’t know they are supposed to or they figure the revenue department won’t pursue action.

“If you purchase an item online, you are expected to report and pay the sales tax for that item to the state Department of Revenue,” Brazell says.

“Some retailers do this at the point of sale, but many don’t. Some companies will charge the sales tax of their state for all online purchases.”

But it gets more complicated if the company charges the sales tax from its point-of-origin, Brazell says. If a consumer purchases an item from a company based in a state that charges 2% sales tax and South Carolina’s sales tax is 5%, the consumer still owes the remaining 3% to South Carolina.

Bernie Maybank, director of the South Carolina Department of Revenue, says until federal legislation is introduced, South Carolina will likely not implement any specific Internet taxation policy and won’t sign on with the Streamlined project.

“It’s abundantly clear that the Internet companies and the catalog companies have the political clout on the federal level that this isn’t likely going to go into effect any time soon,” he says.

“The Streamlined project, while it would create uniformity and simplification, would create an awful lot of political anguish in adopting it. Uniformity and simplification are always good things, but I don’t think they’re worth the problems the project could bring about.”

Local merchants unfazed

Until South Carolina passes a law mandating retailers charge sales tax to out-of-state consumers, or the federal government steps in to do the same, local retailers say they will continue with their e-commerce as they always have: charge in-state consumers sales tax and let the rest go tax-free.

Ruth Brennan, owner of Bits of Lace, a downtown Charleston lingerie store, says that her company charges South Carolina sales tax on any items that are sold in state, but anyone purchasing from out-of-state is not charged tax. She says people prefer it that way.

“People like to shop online and out of state because they can often find goods and not have to pay tax on them,” she says. “I think this will be a difficult concept for the public to receive and accept. Right now, if the purchase is made in-state, we charge taxes; if not, we don’t. If the law changes, we will comply with it even if we don’t agree with it.”

Matthew French is a staff writer for the Business Journal. E-mail him at mfrench@charlestonbusiness.com.

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